Mortgages remain fairly well supported as technicals are still favorable and the market holds range bound on the uncertainty of war with Iraq. Over the Wednesday-to-Wednesday period, spreads were tighter. For example, 30-year Fannie Mae 5.5s moved in one basis point, 6s were tighter by 10 basis points, and 6.5s and 7s by six basis points. Dwarfs were five basis points firmer in 5s and seven in 5.5% and 6% coupons. Lastly, Ginnie Maes were flat in 5.5s and 6.5s, and minus five basis points in 6s and 7s.
The week saw fairly strong supply of $7 billion to $8 billion in current coupons over the last five days. Investors were mixed with many holding near the sidelines before and after Secretary of State Colin Powell's address to the U.N. Security Council. Others took advantage of the supply-induced widening and improving technicals as a result of an increased CMO bid.
Looking ahead to this week, there are several positive events to support mortgages. They include the calendar flip, quarterly refunding and reinvestment of paydowns.
The Mortgage Bankers Association (MBA) reported a decline in refinancing applications and an increase in purchases for the week ending Jan. 31. The Refi Index fell 4% to 5622. Many analysts on the street were expecting the index to pop above 6000 on the favorable level of mortgage rates. Salomon Smith Barney attributes the modest decline to a brief increase in mortgage rates. Also, the previous report was adjusted for the Martin Luther King holiday, and it is possible that activity was actually slower than the adjustment factor noted. The Purchase Index rose 2% to 371.
The MBA also announced that as a percent of total applications, refinancings were 73.1%, down from 75.4% in the previous week. In response to new record low ARM rates, the share of ARM activity rose to 13.9% from 13.2%.
Fixed mortgage rates dipped lower according to Freddie Mac. For the week ending Feb. 7, the 30-year fixed mortgage rate declined two basis points to 5.88% and the 15-year fixed rate was down one basis point to 5.27%. These levels are just a few basis points above their record lows of 5.85% and 5.24% hit at the beginning of the year. Meanwhile, the one-year ARM rate held steady at 3.89%, its record low.
With rates holding below 6%, over 80% of the agency fixed mortgage market has some refi incentive. This suggests that prepayments will continue to remain at or near record levels for several months. In order for another major refi event to occur, however, Bear Stearns says the rate on the 10-year would have to drop to 3.50%, which would push mortgage rates to between 5.60% and 5.70%.
On Friday, Feb. 7 (after press time), the housing agencies were to have reported January prepayments. Based on consensus expectations, speeds on 30-year Fannie Maes were predicted to slow around 5% to 6% for 6s and 6.5s. Higher coupons were seen slowing about 2% to 3% from December. Ginnies were expected to slow slightly more in the lower coupons, approximately 6% to 7%, while higher coupons are slightly less at around 1% to 2%.
Looking ahead to February, speeds are expected to record somewhat greater slowing than noted in the January report. March has speeds reversing and increasing around 5% to 10%.
Freddie Mac recently released its quarterly cash-out refi survey. For the fourth quarter, 41% of Freddie Mac-owned loans were refinanced into new mortgages that were at least 5% higher in amount than the original mortgages. This is down from 48% reported in the fourth quarter of 2001, and 44% for Q3 2002. The median age of the refinanced loans was 3.0 years, the same as in Q4 2001. The median house-price appreciation was 9% during the time since the original loan was made, down from 13% a year ago. Finally, their survey reported that 23% of mortgages refinanced during the quarter had lower new loan amounts.
Last year 47% of borrowers who refinanced increased their first mortgage loan by a minimum of 5%. By region, Freddie Mac noted that 52% of families in the Northeast took cash out of their homes. The Northeast experienced the largest home price appreciation, about 22%, between the period of the original mortgage and refinancing, 3.9 years.
Freddie Mac's survey also found that in 2002, homeowners with conventional conforming loans took about $90 billion in equity out of their homes versus $84 billion in 2001. They also noted that home equity for all families across the U.S. grew by $500 billion. Lastly, the average LTV on refinanced loans continues to be close to 70% which shows "that the average family maintains a significant quantity of home equity after refinancing," said Frank Nothaft, Freddie's chief economist,
Looking to 2003, Freddie's economist expects that by Q3, the refi market will have cooled considerably due to increases in rates. He predicts the 30-year fixed mortgage rate to be around 6.25% to 6.5% by year-end.
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